Japanese investors are among the wealthiest in the world, but also the most conservative after two decades of economic stagnation. But they are changing their attitude to money – and the global funds industry is set to reap the rewards.

Six years ago, Junichiro Koizumi, then Prime Minister of Japan, called on Japanese consumers to shift their assets “from savings to investment”. Since then the national mutual funds business has boomed. It grew by more than 16% each year from 2003 to 2007, when it reached $800bn, according to Charles Beazley, president of Nikko Asset Management’s European business.

The financial crisis put a brake on the boom: last year it plunged in size to $521bn. But Beazley said: “We do not think the bull market for funds growth is over in Japan. We believe it will continue as the market recovers and the demand for yield replaces the fear of the past nine months.

“Consequently, a renewed and higher growth rate for funds could well see a $1.5 trillion (€1 trillion) market in the next seven years which would put it finally on a par with the US and Germany.”

Other Japanese asset managers agree that retail investors are set to invest huge amounts of cash. Endo Hiroaki, head of financial institutions for T Rowe Price in Japan, said the size of the market could triple in the next decade. Daisuke Ishihara, a director at Chuo Mitsui’s business in London, said there will be a “massive increase” in mutual fund investments in the next five years. Chuo Mitsui said last week that it is looking to buy, or partner with, a European asset manager to serve its growing Japanese client base.

Japanese institutions are also moving money into risk assets and investing more abroad. David Jiang, chief executive of BNY Mellon Asset Management’s Asia Pacific business, said it has seen institutional and retail investors looking at investing in higher-risk assets. Last week, BNY Mellon said that the Japanese Government Investment Pension Fund, believed to be the largest single fund in the world with $1.5 trillion of assets, gave two global equities mandates to the asset managers’ boutiques, Newton and Walter Scott.

Aberdeen Asset Management cut a distribution deal with Mitsubishi UFJ Asset Management late last year. Martin Gilbert, its chief executive, cited the trend for Japanese pension schemes to allocate assets abroad and via specialised mandates. Japanese institutions have reportedly been circling Nikko Asset Management, owned by Citigroup. It has been looking for a buyer for months, according to reports.

Japanese investors have historically been viewed as far more conservative than their counterparts in the US and Europe, and with good reason. They continue to hold more than half of their assets in bank deposits, according to official estimates. But policy decisions over the past decade have led to increasing investment. Asset managers highlight the decision in 2005 to allow mutual funds to be marketed through the post office as a turning point – it gave the funds industry a direct channel into the country’s largest pot of assets.

Changing attitudes mean that investment activity in Japan now looks remarkably similar to that in other large jurisdictions. Demand for corporate bonds today is surging in Japan, just as it is in the UK and US. One beneficiary is Nomura, which launched a high-yield bond fund in January that has reached almost $4.5bn.

Another bugbear for Japan-watchers – its ageing population, which leads to an assumption that a greater proportion of assets will be held by more conservative investors – is also mistaken, according to Ishihara.

He said: “The Japanese character has historically meant that investors are not good at taking risks. It was primarily a manufacturer, so older generations do not approve of profiting purely from investment. But that only applies for those in their eighties – those in their sixties, and younger, don’t have that attitude.”

However, though the consensus is of there being a significant influx of assets over the next five to 10 years, the scale of last year’s financial crisis has led to scepticism.

Akiyoshi Oba is president of Tokio Marine Asset Management. He was appointed this week, after joining earlier this year from the Mizuho Pension Research Institute where he was president and chief executive. He said: “Investors are suffering from the losses associated with previous investments, and whether they come back or not is a huge issue for mutual funds in Japan.”

His estimate that 40% of Japanese pension schemes are still deciding whether to rebalance their portfolios in the wake of the crisis also suggests a delay for their plans to diversify their investments abroad.

Investor attitudes are closely tied to the equity markets, he said – if the Nikkei 225 index rises to 10,000 or 11,000, investors could come back in force. Last week, the Nikkei was trading close to a six-month high, closing on Thursday at nearly 9400.

Ishihara agreed that the current environment is unfavourable for the industry, but as soon as markets and the economy recover, so should investors’ willingness, he said. “The recession won’t last forever. We could see a sharp increase when it is over.”

• Top Japanese asset managers

Japan’s asset management industry is dominated by insurers and retail banks, which have sold their products to retail investors alongside more standard insurance and banking products, write William Hutchings and Elizabeth Pfeuti.

The two largest managers have taken stakes in foreign asset management firms in a bid to build their expertise and increase the attractiveness of their range of investment products – a move Chuo Mitsui, which is counted 10th largest asset manager in Japan, now appears to be attempting to follow by hiring corporate financier Canaccord Adams to help it search for an asset manager to buy in Europe.

Nippon Life bought a 5% equity stake in Russell Investments, a US multimanager specialist investment consultant, to boost its asset management capability in October last year. More recently, the company announced it would boost holdings in domestic Government bonds and foreign stocks by around ¥1 trillion (€7.5bn) in the financial year to March 2010. The company has also been linked with buying assets from beleaguered American insurer AIG.

Mitsubishi UFJ Financial

AuM: $308bn (September 30, 2008)

Mitsubishi UFJ Financial appointed former UBS co-head of rates, Sascha Prinz, to its London office last month after announcing a global strategic alliance with US investment bank Morgan Stanley.
To further this global outlook, the insurer took almost 10% of Aberdeen Asset Management in October and later in the year registered with the Qatar Financial Centre to enhance its presence in the Middle East.

Zenkyoren

AuM: $437bn (March 31, 2008)

To build a solid, long-term earnings base, Zenkyoren invested principally in yen-denominated bonds and other debt instruments in the financial year, but decided in March last year to change its investment stance to target the medium to long term and increase profitability. Last year, the insurer worked with reinsurer Munich Re to transfer $1bn of earthquake and other natural catastrophe risks to capital markets and remains the only Japanese insurance company to offer farmers low interest loans in order to promote agricultural activity in the country.

Mizuho is hoping to expand its asset management business. Last year, it expanded the diversity of its investment products by adding investment trusts, including a global natural resources equity fund, and it plans to increase its sales force of financial consultants from 2,800 to 4,000. For high net worth individuals, with ¥500m or more, it has established Mizuho Private Wealth Management and developed private banking products.

Dai-Ichi Life

AuM: $320bn (March 31, 2008)

Dai-Ichi says its investment portfolios are built around a core of yen-denominated fixed income assets, consisting mainly of domestic bonds, but it is trying to increase the investment returns by incorporating Japanese equities and foreign securities – subject to the proviso that these be within an “acceptable” range of risk. It said in its most recent report to shareholders, for the March 2008 year end, that it had improved its risk monitoring by implementing a risk management system, and had increased its investment efficiency.